Erik Blachford controls half of the online travel market—and Barry Diller's Net ambitions are riding on his shoulders. So why is the CEO of IAC Travel so relaxed?

By John Battelle

October 1, 2004

(Business 2.0) – Within Barry Diller's online empire, InterActiveCorp, there's no business more vital than IAC Travel—which makes Erik Blachford his most important lieutenant. Overseeing Expedia, Hotels.com, Hotwire, and other travel properties, Blachford is responsible for 37 percent of IAC's revenue and more than two-thirds of its profits. Still, even as IAC Travel's growth has been extraordinary—it's now the third-largest travel agency in the world—it's feeling the pressure from any number of competitors, including its suppliers, competing online services, and even portals and search engines. To keep growth going, Blachford is expanding into Europe and Asia and has dived into the $100 billion corporate travel market. But what he's really dreaming of is re-creating the perfect travel agent online.

Barry Diller was once asked about IAC Travel, and he replied by saying something to the effect of "You think this is the future of travel; I think it's the future of everything." Does he see what you're doing in travel as indicative of the future of the entire Internet?

InterActiveCorp, at the highest level, is just a big bet on consumers using the Internet for more stuff. If you fundamentally believe that the Internet is going to provide people with richer and better information for making decisions, then you have to make bets across a pretty wide variety of things. We've got high airline ticket prices, and hotel rooms are expensive, so the dollar figures involved get pretty eye-popping pretty fast, and that's one of the reasons people like to point to the travel category.

I understand that more than 20 percent of the travel business is now booked online.

It's closer to 25 percent this year. It's probably going to around 35 percent by 2006. By the time you get to 2010 or 2011, we think between one-half and three-quarters of leisure and unmanaged business travel—everything not handled by corporate travel agencies, that is—should be online.

With growth prospects like that, why did IAC take a hit in the last quarterly earnings? Why does Wall Street not give it the same earnings multiple as its peer group?

Well, you had a couple of different things going on. On the one hand, the whole category did get beaten up pretty badly. So there is something to be said for people just looking at the overall growth trends quarter over quarter in online travel and saying, "Boy, that didn't seem quite as quick as we were expecting."

With the war and SARS in 2003, you had a lot of cheap hotel rooms to sell, right? That wasn't true this year.

I don't know that any of us have done a really good job of explaining that—mea culpa. I think that's part of it; with a surprise like that go questions about what's coming up. If this just means we have to execute for a bunch of quarters in a row, and that's what it takes to get people feeling good about the business again, that's OK.

What are you planning to do to keep growth going?

Travel's a global business, so we have to be a global company. We've made a concerted push to go beyond the borders of the United States. We've done very well in North America and we've got a leadership position in Europe, and we've just entered the Asia-Pacific region, which is the third-biggest travel market in the world.

In the past few years, we've seen explosive growth, but almost all of it has been on the leisure travel side. Now we're very focused on moving from the leisure market into the corporate travel market. That's a different business—servicing travel management needs from corporations—but it does line up awfully well with the core technology and service we've built.

Corporate travel—you really think you can crack that nut?

If you're running a corporate travel department, your job is to save the company money. We decided we had the right combination of technology—which we can bring over with some modification from the leisure side—and service, which we actually acquired through a company called Metropolitan Travel in Seattle. By putting the two things under one roof and really paying attention to integrating them, we can deliver a lower-cost solution and pass the savings on to the corporate customers. Corporate travel is a classic example of a business that just costs too much. The typical travel management company will charge $40 or $50 per transaction. We charge $5 for an online booking and $20 for phone transactions.

So you make money the same way as with leisure—on deals with travel providers—but also on the service fees?

That's correct. We save the companies money on the fee that we charge, and then we actually find them better prices too. The merchant model we have in hotels, for example, allows us to deliver better prices on the front end to customers, and then we also make a good margin on the back end.

In the merchant model, you actually buy rooms at one rate and sell them at another, making money on the margin instead of a flat commission. Is that model why the InterContinental hotel chain recently announced that it didn't want to play anymore—you were taking too much of its margin?

Hotels are like any other businesses. They're going to have times when it's easier to get business and times when it's tougher. Over the last few years, the travel industry's found it a little tougher to get business. This year the economy's doing somewhat better and most of the hotels are a little fuller. A lot of the hotels are looking at the marketing mix they use to bring in bookings, and some of them are finding that they don't need to put rooms on sale quite as much. But the InterContinental case is a bit different. I think the best way to think about it is as a price negotiation that's broken out into public view.

So, at the end of the day, whom do you serve? Are you a champion of the consumer or a distributor to your suppliers?

The answer is, it depends. There are definitely cases where the interests align and the best way to make sure a consumer gets the best deal is by pushing the thing that happens to be on sale from a distributor. A consumer never minds being merchandized to if it's going to save him a bunch of money. People don't like to have stuff pushed in their face. On the other hand, we have to make some judgments about what to put at the top of various lists, and we try to mix together what we know about what our customers want with the best prices that we can find in the market. The exception is air travel, where we actually start with the lowest price and sort downward from there because that's the consumer default.

Will you be adding anything to the site that gives consumers the upper hand?

We're going to launch user reviews of hotels. Consumers can browse through and get a good understanding of what other consumers think about different hotels, and hotels can look and see how they're being rated by our customers on our site. The best way for them to improve their rating is by treating their customers better.

Can anything save the big airlines—American, United, and all these other megacarriers? Are we going to see these huge brands give up the ghost?

The bottom line is that the country needs a certain amount of airline infrastructure to keep moving properly. But it's easy for me to imagine some restructuring. Some of the carriers have been making pretty good strides in restructuring and trying to get more competitive with the low-cost carriers. Right now, though, there really is a crisis based on fuel costs. And the low-cost carriers, because of their financial stability, have been better able to hedge fuel costs. That's making life difficult for a lot of the larger carriers. A higher-cost carrier might have to match prices even if it's uneconomical to do so. One of the ways they afford that might be by giving up landing slots in airports. Of course, that gives the low-cost carriers new entry into those airports, and the cycle repeats again.

Some of the largest low-fare airlines refuse to sell through online travel sites, yours included. What are you doing to bring them into the fold?

Of the established low-cost carriers, only Southwest and JetBlue currently restrict online sales to their own sites. We sell the other low-cost carriers and a great selection of full-service carriers. Our customer purchase volumes indicate that our carrier selection works pretty well. We're always ready to talk to Southwest and JetBlue about distributing through our sites, and we believe that as the low-cost airlines compete more against one another for share, our distribution reach is going to look even more attractive.

You lobbied hard against Orbitz when the airlines first backed it. Why? Are you still as concerned about Orbitz?

In its early incarnation, Orbitz had exclusive access to airlines' Web-only fares, and a series of interlocking contracts made it unattractive for any carrier to put any seats on sale anywhere other than Orbitz. That structure became less relevant with the decline of Web-only fares over the past few years. All we ever wanted was a level playing field.

What would you like to be able to do in your business that so far is not possible?

There's this mythical really good travel agent—a breed rarely seen in the wild—somebody out there who knows you, knows your family, what you like, what you don't like, where you've been, how it went, your preferences about weather, your cost sensitivities, that you like to splurge on a few things, and what those things are. That person can guide you through the trip-planning process. That's what an online travel site should be eventually.

What other trends in travel do you see from were you stand?

You see a tendency in the United States toward shorter vacations. People are less interested in the traditional seven-day break and more interested in four- and five-day weekends. That's having a real impact on pricing and policies, especially on traditional tour operators. We've seen a lot of receptivity to the dynamic packaging of travel on the Internet. People are not that happy with the old models, which haven't adapted to fit the way people want to travel today. About 10 percent of people will take a package vacation across the industry, but online it could go north of 30 percent. It's also happening in Europe.

The same thing is playing out there? I can't imagine they'd give up their six weeks of time off!

In Europe you've got a situation where tour operators have had much more impact on vacations than they have in the United States. But that model is being eroded by exactly the same force. People want more flexibility, and they realize the only way to get it is on the Internet.